November’s core CPI gain solidifies expectations for a Federal Reserve rate cut next week

A note from BMO on the US CPI data, with analysts there saying the November core CPI gain of 0.308% has solidified expectations of a Federal Reserve rate cut next week, but persistent inflationary pressures suggest a slower pace of easing in 2025. Four consecutive monthly gains of 0.3% in the core index have driven the three- and six-month annualized rates to multi-month highs, highlighting the continued stickiness of inflation.

The analysts go on to say that the three-month seasonally adjusted annualized rate (SAAR) climbed to a seven-month high of 3.7%, a notable rebound from its cycle low of 1.6% in July. Similarly, the six-month SAAR rose to 2.9%, marking a five-month high and edging up from the cycle low of 2.6% in October. Adding to the Fed’s concerns, core goods posted a robust 0.308% increase, the largest monthly gain since May 2023. While some analysts argue this spike may be more noise than signal, it nonetheless complicates the Fed’s inflation narrative.

On a more positive note, signs of cooling emerged in some stickier inflation categories, particularly within core services. Core services inflation decelerated to 0.276%, buoyed by a notable slowdown in shelter costs. Rent increased by just 0.21%, its smallest monthly rise since April 2021, while owners’ equivalent rent (OER) advanced 0.23%, the smallest uptick since January 2021.

These trends align with Fed Chair Jerome Powell’s view that the elevated housing services inflation is largely a “catch-up” phenomenon, reflecting past inflationary pressures rather than ongoing ones. Powell’s perspective may offer policymakers a measure of reassurance as they navigate a delicate balance between managing persistent inflation and supporting economic growth.

While a rate cut appears imminent, the data underscores the challenges ahead for the Fed, as inflation dynamics remain uneven across sectors. With core inflation metrics still elevated, the Fed’s pivot toward a more gradual pace of rate reductions in 2025 seems increasingly likely.

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Seems to me that sticky high inflation is a reason not to cut, but I seem to be out of touch.

My bewilderment found expression in this I posted earlier, giving it a re-run now.

This article was written by Eamonn Sheridan at www.forexlive.com.